timing wize everything is set to the proper specifications and checked and reset several times.I have two OH160 engines and they both do the same thing. When its running you can see into the cylinder around the valve. I have never seen anything like it, not stock anyway. The engine has plenty of horsepower and is on my sons 69 ss12 pulling tractor.

if you're pulling, i would leave it alone. It's probably better that way anyways. With no muffler, it's probably normal function and if you lean it up too much, it will have a tendency to run hotter and have less power.